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When are adaptive expectations rational? A generalization

Shepherd, Ben (2011): When are adaptive expectations rational? A generalization.

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Abstract

This note presents a simple generalization of the adaptive expectations mechanism in which the learning parameter is time variant. It is shown that expectations generated in this way are rational in the sense of producing minimum mean squared forecast errors for a broad class of time series models, namely any process that can be written in linear state space form.

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